Theories of Economic Growth
Adam Smith 1776
1. Advocated division of labour, specialisation & accumulation of capital
2. Advocated Laissez Faire - minimum government interference
David Ricardo
1. Formalised notion of diminishing returns, but did not take innovation into account.
2. Showed some of the welfare gains from specialisation and international trade based on comparative advantage
Robert Solow: Neo-classical growth model
A combination of capital accumulation(1) and technological improvement (2) explains major trends in economic growth.
1. Adding more capital goods to a fixed amount of labour will lead to diminishing returns to capital.
2. Increased capital accumulation drives the rate of return on capital down
3. Eventually, the rate of return may be so low that no further net capital accumulation takes place.
4. In which case the rate of technological progress determined the rate of growth of output
Technological progress is assumed to be exogenous i.e. lies outside the growth model.
Paul Romer Model
Seeking to make technological progress endogenous.
1. A firm will not innovate unless it thinks it can steal a march on its competition & earn higher profits.
2. Inconsistent with Neo-Classical assumption of perfect competition - no "abnormal profits".
3. Attention shifted to conditions under which a firm will innovate most productively.
4. If capital broadened to include human capital, law of diminishing returns may not apply - increasing returns to investment from education & efficiency - innovation not necessary.
5. Extent of capacity usage - government encouragement of open markets.
posted by yuhu @ 8:49 AM
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